Coronavirus Economy Effects

Coronavirus Economy Effects

Posted by BANKUS on March 14th 2020


A falling stock market, the shadow of a recession and Fed interest rate cuts plus government stimulus. It's beginning to feel a lot like 2008 again. For many Americans, the market crash and growing recession triggered by the global spread of the coronavirus are bringing memories of the 2008 financial crisis. While the toll the infection ultimately takes on the nation isn’t clear, the economic upheaval caused by the outbreak will likely not be nearly as damaging as the historic downturn of 2007-09.

"A recession is not inevitable,” says Gus Faucher, chief economist of PNC Financial Services Group. “If we do get a recession, it is likely to be brief and much less severe than the Great Recession."

For one thing, the 2008 financial crisis and recession resulted from years of deeply rooted weak spots in the economy. That’s not the case now. “What we’re seeing is caused by something external to the economy,” Faucher says. “It’s closer to a natural disaster,” says Kathy Bostjancic, director of U.S. Macro Investors Services at Oxford Economics.

The coronavirus, which originated in China late last year, has sparked today’s economic recession. There are now more than 100,000 cases worldwide, most of them in China, and the death toll has topped 4,000. In the U.S., more than 800 people have been infected and 28 have died. Because far fewer people are affected than in 2007-2009, the economic toll has been limited so far. The travel and tourism industry has suffered the most, with businesses canceling events and trade shows. Disruptions to deliveries of manufacturing parts and retail goods from China could temporarily shut down American factories and leave store shelves empty. As Americans avoid more public places, the virus is likely to hurt sales at restaurants, malls and other similar venues. There are some signs retailers are already taking a hit. In the last week of February, foot traffic to Walmart stores fell 16.5% compared with the previous week. In the same week, however, traffic to Costco stores rose 7.7%.

Losses are likely to total in the thousands, with travel and tourism and manufacturing enduring much of them, The 3.5% unemployment rate, a 50-year low, could rise to 3.8% to 4.1%, says Diane Swonk, chief economist of Grant Thornton.

Assuming the number of cases peak in the next few months and subsides by summer, it is likely to last for about six months or so.Most economists expect the virus to shave growth by one or two percentage points over the next couple of quarters.

As for the stock market it hasn’t seen the same sizable drop that the broader market suffered in the depths of the financial crisis. The Standard & Poor's 500 dropped 14.9% from its Feb. 19 record through Tuesday, teetering on the brink of a bear market, or a drop of 20% from a peak.

Corporations had $9.3 trillion in rated debt in 2019, according to S&P Global Ratings. But a higher percentage of corporate debt today is considered to be investment grade at 72%. The major sector most likely to fail to make payments on time, as of 2019, was the automotive industry, where about 4 in 5 companies have debt rated as speculative. Another sector facing high risk is the retail industry, where department stores, mall-based retailers and many other shops have already been struggling. Though the oil-and-gas sector is expected to be hit hard by the sharp decline in oil prices, the industry is heading into this crisis in an accepted rate. Only 31% of oil-and-gas companies had debt rated as junk in 2019.

The global financial crisis ushered in sweeping changes to how the U.S. government regulates the banking industry. The new era, which included the Dodd-Frank Act in 2010, required banks to have more cash in reserves to provide a cushion in case the financial system faced economic shocks. In the U.S., banks with more than $100 billion in assets are required to take the Federal Reserve’s “stress tests,” a move that ensures financial firms have the capital necessary to continue operating during times of economic duress. The magnitude of the challenges the economy faces aren’t as dire as the obstacles during the Great Recession, experts say.

This isn’t a financial crisis,” says Jonathan Corpina, senior managing partner at broker-dealer Meridian Equity Partners. “This is a global epidemic. This isn’t a flaw in the system that we’re uncovering like the subprime mortgage debacle”

As for the Fed’s benchmark rate is at a range of just 1% to 1.25%, giving officials little room to cut. And 10-year Treasury rates are already below 1%, raising questions about the effectiveness of a renewed bond-buying campaign. The damage this time is more contained and lawmakers are discussing more targeted measures, such as helping the beleaguered travel industry and offsetting income losses for hourly workers by expanding paid sick leave and unemployment insurance.

As for the housing although prices have risen steadily in recent years, they’re just 22% above their peak. Homes aren’t overpriced, Faucher says. That means with mortgage rates low, housing can help offset troubles in the rest of the economy.